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PRA Consults on MiFID 2 Implementation

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By Emma Radmore

As the EU still sorts out the timing of MiFID 2
implementation, the UK authorities forge ahead. Following papers
from HM Treasury and FCA, PRA is now consulting on some of the
changes it intends to make to its rules to take account of MiFID
2.

MiFID 2 Implementation
Timeline

Currently, the MiFID 2 package is still scheduled to
take effect on 3 January 2017. Member States are supposed to have
finalised necessary changes to domestic laws by 3 July 2016.

It is now clear the application deadline will not be
met, because of a combination of the European Commission having
failed to meet its deadlines to produce level 2 legislation and
endorse technical standards ESMA had produced, and significant
concern that firms and trading venues would not have long enough
from the time all relevant standards were finalised to put in place
necessary policies and procedures. Legislation is being prepared at
EU level to delay the application date and related deadlines by one
year.

However, this does not mean that everything can stop
for a year. The UK regulators have forged ahead, with several
discussion and consultation papers already published. Now PRA has
published its first major paper, looking at changes it will need to
make to its Rulebook, of which relevant firms it regulates must be
aware. PRA notes there has in fact been no proposal at EU level to
delay the 3 July 2016 transposition date—and indeed, many
discussions around the application delay have stressed the delay is
to give firms time to prepare once the final rules are in place,
rather than to provide a breathing space for regulators to make the
final rules.

Which Firms Will Be
Affected?

The rule changes will affect PRA-designated banks,
building societies, investment firms and their qualifying parent
undertakings—financial holding companies and mixed financial
holding companies, as well as credit institutions, investment firms
and financial institutions that are subsidiaries of these
firms.

What Does the Paper Cover?

This paper covers two specific areas:

• extension of scope from MiFID to MiFID 2 and
harmonisation of the passporting regime; and

PRA's Approach to MiFID 2
Implementation

PRA notes that in some cases its existing rules are
sufficient for transposition purposes, but that it has identified
already several provisions within MiFID 2 and MiFIR which will
require change to its rules. It has aligned its proposals to those
FCA has already published.

Passporting

PRA notes MiFID 2 makes some “small but important”
changes to the current passporting regime that will affect
dual-regulated firms. Specifically it extends:

• the range of passportable investment services
and activities, to include the operation of an organised trading
facility (OTF); and

• the range of investments to include the new
instrument of emissions allowances.

PRA says existing passports will remain valid and
unchanged but firms wishing to include the new activities or
instruments will need to amend their passport. They should use the
existing PRA procedures for a change in particulars. However, ESMA
has published standard templates for notifications. Once the
Commission has approved these, investment firms and, to the extent
relevant, credit institutions, should use these forms. PRA
proposes:

• to delete its existing forms and link directly
to the EU forms; and

• to extend its current CRD 4 passport
notification declaration form to notifications under MiFID 2 and
make minor changes to the declaration.

Where firms want to passport MiFID activities under
CRD 4, PRA will continue to process applications as it currently
does and in compliance with relevant EBA forms. However, it notes
that credit institutions should be aware they will need to comply
with MiFID 2 standards if using MiFID 2 tied agents.

Algorithmic Trading

To date, no PRA rule has focussed on algorithmic
trading. To comply with the MiFID 2 requirements, PRA proposes to
create a new part of the PRA Rulebook, called the Algorithmic
Trading Part. This will apply to any CRR firm (including credit
institutions) that engages in algorithmic trading or provides DEA
to a trading venue.

PRA says its proposals largely mirror FCA's, and
that the new Part should be read in conjunction with several
existing parts of the Rulebook that address organisational
requirements, systems and controls and compliance. However, it says
its proposals have to focus on the safety and soundness of firms,
whereas FCA's focus is on preventing abuse of the markets. PRA
knows dual-regulated firms will be interested in how both
regulators deal with supervising algorithmic trading and plans to
provide further clarity in due course.

PRA proposes to require firms that carry out
algorithmic trading to ensure their trading systems:

• are resilient and have sufficient
capacity;

• are subject to appropriate trading thresholds
and limits; and

• prevent the sending of erroneous orders or
contribute to a disorderly market.

Firms will also need to put in place tested and
monitored business continuity arrangements to guard against the
risks of failure.

PRA does not propose to require firms to notify it
if they engage in algorithmic trading as all firms that do so will
need to notify FCA.

Similarly they may notify only FCA of the trading
venue they use, but should notify PRA if there is a material change
to their business. PRA also plans to impose record-keeping
requirements covering algorithmic trading strategies, parameters
and limits and put in place specific requirements for high
frequency trading.

Changes to Rules

PRA has published for consultation:

• the PRA Rulebook: Passporting instrument;
and

• the PRA Rulebook: CRR firms: Algorithmic
trading instrument.

What Happens Next?

PRA asks for comments by 27 May. It is, of course,
consulting now without the benefit of the final form Level 2
legislation or technical standards, and may have to change its
proposals once the EU finalises the delegated legislation.

It seems highly optimistic to think that the final
rules will be in place by 3 July.

Emma Radmore
is a Managing Associate at Dentons UKMEA LLP, London. She is also a
member of the World Securities Law Report Advisory Board. She may
be contacted at emma.radmore@dentons.com.

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